10 Year-End Tax Moves to Make Now

These tax tips can help improve your financial health and stimulate tax-time savings. By Derrick Lilly | Digital Exclusive - 2020



With 2020 coming to a close, now’s the time to give your financial health a check-up. These smart money moves can help ease tax burdens and boost tax refunds for a financially healthier 2021.

1. Defer a bonus: If you’re one of the lucky ones to work for a company that thrived during the pandemic, a year-end bonus may be coming your way. If your employer will allow it, delay collecting your bonus until January to defer the tax hit to 2021.

2. Donate to charity: If you can afford to give, the need has never been greater, and what’s good for others is good for your taxes. A CARES Act provision allows individual taxpayers to receive up to a $300 tax deduction, even if they claim the standard deduction, for making a cash donation of up to $300 to a qualified charity by Dec. 31, 2020.

3. Boost retirement contributions: You can reduce your taxable income and build your nest egg by maxing out contributions into your employer’s 401(k), 403(b), 457 plan, or Thrift Savings Plan. The contribution limit for 2020 is $19,500, and the additional catch-up contribution limit for employees aged 50 and over is $6,500. For participants in a SIMPLE retirement account, the 2020 contribution limit is $13,500. The contribution to an individual Traditional IRA remains $6,000, and an additional catch-up contribution of $1,000 is allowed for individuals aged 50 and over.

4. Skip your RMD: If you’re in retirement, the CARES Act relaxes retirement account rules for 2020, waiving required minimum distributions (RMD) this year. If you don’t need the funds, you can skip the distribution, thus lowering your taxable income for the year.

5. Set up a retirement plan: If you set out on your own in 2020, set up a Simplified Employee Pension (SEP) plan for yourself. Self-employed individuals can lower their taxable income by contributing up to 25 percent of their self-employment income (up to $57,000 for 2020) to a SEP IRA. Your SEP IRA must be established by your company’s tax filing deadline (plus any extensions) for the tax year in which the qualifying contribution is made.

6. Harvest investment losses: If you have investments in your portfolio that have declined in value since purchase, you can sell them to realize the loss, which will offset any realized capital gains and reduce your taxable income this year. Sell these investments by Dec. 28, 2020 to ensure the trades settle before the end of the year. You can deduct up to $3,000 of realized losses—anything above will be passed to the next tax year. Just be aware of the wash sale rule—buying back these shares within 30 days will defer your loss.

7. Max out your HSA: Another method for lowering your taxable income is to contribute the maximum allowed to a Health Savings Account (HAS), which is generally $3,550 for individuals or $7,100 for families; an additional $1,000 catch-up contribution is allowed if age 55 or older. HSA contributions can be deducted through payroll, or direct contributions can be made to ensure the maximum is met.

8. Deduct your dependents: If you support a parent, grandparent, or another loved one, they may qualify as a non-child dependent, making you eligible for the new “Other Dependent Credit,” which allows you to reduce your tax burden by up to $500. This credit begins to phase out for individuals with income over $200,000 and married couples filing jointly with income over $400,000.

9. Take a class: Taking courses to improve your skills and advance your career could make you eligible for up to a $2,000 tax credit via the Lifetime Learning Credit. Deducting expenses paid this year, or prepaying next year’s tuition by Dec. 31, 2020, may give you a valuable bump to your tax refund. The amount of this credit is gradually reduced for taxpayers earning between $58,000 and $68,000 ($116,000 and $136,000 if married filing jointly) and is phased out for taxpayers earning $68,000 or more ($136,000 if married filing jointly).

10. Give a gift: If you have an estate to pass on to beneficiaries, remember you can gift up to $15,000 to as many of them as you’d like this year without paying a gift tax or reducing your lifetime estate tax exclusion amount. Make these gifts by Dec. 31, 2020.

If you ever have doubts about your financial health or tax position, keep in mind a certified public accountant (CPA) is strategically positioned to help determine the best ways to maximize your tax deductions and tax refunds. The Illinois CPA Society’s free “Find a CPA” directory can assist you in finding the trusted, strategic advisor that’s right for you.